How do businesses determine the correct depreciation start date for newly acquired assets?
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To determine the correct depreciation start date for newly acquired assets, businesses must identify the date the property is “placed in service.” This date is critical because it marks when depreciation deductions begin under the Internal Revenue Code (IRC) and Treasury Regulations. The process involves both legal requirements and practical considerations, as detailed below.
1. Definition of "Placed in Service"
The term “placed in service” is not explicitly defined in the Code, but both the regulations and IRS guidance provide a consistent standard: property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function in the taxpayer’s trade or business or for the production of income. This does not require actual use, but the property must be ready and available for its intended use.
2. Practical Application: When Is Property "Ready and Available"?
The placed-in-service date is the earlier of:- The date the property is ready and available for its intended use in the business, or- The date the property is actually used for its intended purpose.
Readiness and availability means:- The taxpayer has legal ownership and the right to use the property.- All necessary permits and licenses have been obtained.- The property is functionally complete and can perform its intended function, even if not yet used at full capacity or if minor testing/adjustments are ongoing.- For buildings, a certificate of occupancy is strong evidence, but not always required if the building is otherwise ready for its intended use.- For equipment, it must be installed and capable of performing its assigned function, even if further testing or minor adjustments are needed.
Examples:- A machine delivered and installed in a factory is placed in service when it is installed and ready to operate, even if not yet used in production.- A rental property is placed in service when it is ready and available for rent, not necessarily when the first tenant moves in.
3. Special Considerations
a. Units of Property
If an asset is part of a larger system (e.g., a production line), the entire system may not be placed in service until all essential components are ready and the system can operate as intended.
b. Testing and Defects
Property can be considered placed in service even if it is undergoing testing to eliminate defects, as long as it is otherwise operational and capable of performing its intended function.
c. Idle Property
Once placed in service, property remains in service for depreciation purposes even if it is temporarily idle (e.g., due to lack of demand).
d. Change of Use
If property is converted from personal to business use, the placed-in-service date is the date of conversion.
4. Documentation
Businesses should maintain records that support the placed-in-service date, such as:- Delivery and installation records- Certificates of occupancy (for buildings)- Permits and licenses- Internal memos or logs showing when the property was ready and available for use- Invoices and acceptance documents
5. Depreciation Conventions
The placed-in-service date determines which depreciation convention applies (half-year, mid-quarter, or mid-month), which in turn affects the amount of depreciation allowed in the first year.
6. Summary Table of Key Steps
- Ownership: Ensure the business owns the property.
- Readiness: Confirm the property is installed, permitted, and ready for its intended use.
- Availability: The property must be available for use in the business or for income production.
- Documentation: Gather and retain evidence supporting the readiness and availability date.
- Depreciation Start: Begin depreciation as of the placed-in-service date, using the appropriate convention.
7. Authority and Precedent
- Rev. Rul. 79-98: A nuclear power plant was placed in service when it was operational and could perform its intended function, not when formally accepted from the contractor.
- IRS Publication 946: Reiterates that property is placed in service when it is ready and available for a specific use, not necessarily when first used.
In summary: Businesses determine the correct depreciation start date for newly acquired assets by identifying the date the property is first ready and available for its specifically assigned function in the business, regardless of whether it is actually used at that time. This is the “placed in service” date, and it is supported by both regulatory authority and IRS guidance. Proper documentation of this date is essential for substantiating depreciation deductions.
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